Originally published: 1998
399 pages
Chapter 29

THE COMMANDING HEIGHTS


Daniel Yergin & Joseph Stanislaw

The Commanding Heights is Daniel Yergin and Joseph Stanislaw's exhaustive global political/economic survey assessing why the free market is the solution to failed collectivist top-down economic policies known as "command economies." Collectivism saw its apogee primarily in Soviet (greater Russia) and Chinese totalitarianism during the latter half of the twentieth century. This parched scheme was also the template for control of the Soviet Union's satellites in Europe and the client states of both in the Third World. The collectivist model matured under Joseph Stalin in the Soviet Union and Mao Zedong in China, but it was guided through its adolescence in the early years of the twentieth century by Vladimir Ilyich Lenin.
     Lenin (1870-1924) was a brutal dictator and the leader of the 1917 Russian Revolution. He believed as much in murder and terror as any revolutionary ever had; he was also an economist, but only out of necessity. Lenin understood what he needed to do-make newly communist Russia work in real-world terms-but he had not enough time and less expertise to achieve that goal because there was just too much to do. His grasp of at least a portion of the fundamentals of economic thinking was sure, but his understanding of how to build a viable command economy was far less so. There was no model to follow, and, of course, the fact that a command economy could not successfully be built by anyone was a reality that escaped his notice in the aftermath of the revolution. In other words, Lenin made the classic political mistake-he thought attaining power was the difficult step when it was the actuality of governing that was impossible.

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     Lenin suffered from the twentieth century's worst case of Enlightenment rationalism. He believed he could intellectually muscle his way through any problem. His successor, Joseph Stalin-less educated and less skilled at either governance or economics-was the century's premier megalomaniac. Between the two of them they caused the deaths of twenty, or fifty, or seventy-five million people-no one will ever know the real number. That fact alone is why these men and their theories must be kept in mind-decade upon decade.
     After his take-over of the machinery of government in the middle of World War I (and his immediate withdrawal of Russia from the Allied war effort by means of a separate peace with Germany), Lenin's health deteriorated fairly quickly (although he had not yet reached 50) so that by the early 1920s he was ailing and frail. Aware of the short time he had left, he became desperate to save the revolution before its economic failings caused a counter-revolution. His brand of socialism-total control of both property and production-had not been economically successful in the early years after the Revolution and the Russian marketplace was in shambles. Lenin tried to reverse this course by introducing what he termed the New Economic Policy in 1921. This program brought back a small degree of capitalism in the form of petty trade and private agriculture. Because his grand vision of state control was not compatible with these modest but desperate measures, Lenin was criticized by his fanatical followers. He made an excuse for his approach by explaining
that the government and the Communist Party would always control the "commanding heights," the high ground of economic power. Lower levels of the economy did not require, at least for the time being, the imposition of puristic socialism; they merely had to work. Lenin the Pragmatic.
     Lenin's failure to make socialism viable was just one in a long string of collectivist fiascoes. Nevertheless, statist economic measures retained their political appeal, even in the United States, long after socialism had been thoroughly discredited philosophically and practically. U.S. president Richard Nixon, standing atop Washington's commanding heights in 1970, instituted wage and price controls when no emergency or threat to the country existed and when the economy was, with little question, healthy. Government's economic intervention in this case was widely thought to be good, even necessary. In reality, it was nothing more than an example of how warped economic and, especially, political theory had become because of the siren song of socialism's progeny: state welfarism.

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     Twenty years later (and seventy after Lenin's initial failures), when communism exposed itself as a futile philosophy amidst the ruins of the Soviet Union, the free market was again on the rise as the antidote to the exorbitant fiscal and psychological costs of collectivist economic control. Capitalism and its market economy had governments shedding public businesses like liberals abandoning a Baptist revival meeting.
     As Yergin and Stanislaw showed in their wide-ranging political/economic survey, none of this happened by accident. Although liberal Western politicians had long been preaching government control and paternalism-mostly because their pronouncements made them feel good and got them re-elected, not because they understood the issues-serious economists had been saying since the turn of the twentieth century that collectivism and socialism would not and could not work.
     As the political cognoscenti realized that an ever-expanding welfare state was as unaffordable intellectually, psychologically, and economically as socialism was, the public began to understand that government was not the answer to every question. Simultaneously, the knowledge of those at government's center proved inferior in competing against the combined knowledge of all participants in the market. In the U.S., economic liberty brought prosperity; elsewhere government controls brought economic stagnation. At this point the pendulum began to swing back toward freedom in economic matters.
     Yergin and Stanislaw explain where many of the free market's mid-twentieth-century economic problems began, with John Maynard Keynes. Keynes was the grand defender of the "prime the pump" theory of economic stability. He held that if governments would spend money to get an economy going (money those governments did not have, which was to be taken from taxpayers and/or printed out of thin air in classic inflationary fashion), the machinery of commerce would ultimately thrive on its own through the multiplier effect founded in the infusion of fresh dollars or credit.
     There were several problems with this theory: it was wrong, in the first place, because money taken from the private sector in the form of taxes is that much less money in the hands of the individuals who actually make the economy work; thus government priming the pump actually slows an economy. Also, the multiplier effect of government employment/spending is miniscule compared with what those dollars do in the open market. Government spending, whether a one-time event to build a bridge or a persistent event such as providing a service

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(welfare, Medicaid) must be continually (negatively) funded entirely through taxation or borrowing. In the private sector the business person spends money and then makes money, over and over, continually creating profits at each step, all of which, to the government's benefit, are taxable. Finally, money taken by the government and then redistributed back into private enterprise suffers from the "friction" of government intervention because a substantial portion of the money taken in is used up in administrative costs, increased red tape, and expansion of the number of government employees and employee benefits (federal employees are the best paid and best protected workers in America), all of which diminish government effectiveness and efficiency, and is therefore money that is mostly lost to the economy.
     Ultimately the Keynesian program was untenable because it led to increased administrative intervention as politicians and bureaucrats decided exactly how to prime the pump. In other words, government didn't just throw money at the economy, or make credit more easily available; government decided that if it was "its" money that was going to do the work, then government itself would determine how the funds would be spent. Politicians and administrators began to believe they had an expertise they cannot and never will have, an expertise that only the market's invisible hand enjoys. Of course, the tendency toward corruption brought about through politically controlled distribution further defeated any chance that real assistance would be effected.
     Keynes made a comment that would explain the eventual demise of his own philosophy:

               Ideas are more powerful than is commonly understood. Indeed, the world
               is ruled by little else. . . . Sooner or later it is ideas, not vested interests,
               which are dangerous for good or evil.

It was the renewed understanding, after World War II, of why government must allow the market to work and why government was inadequate to order the economy that dealt the death blow to socialistic theory in all its guises. (However, socialistic goals are manifestly and unfortunately not dead.)
     Although some economists-notably those at the University of Chicago, before, during, and after World War II-correctly appreciated the market's imperatives, these academics could not effect political change; they could only offer economic principles, coupled with a sound 

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and useful understanding of human nature. This is the second theme treated at length in The Commanding Heights. As the authors explain, the importance of political leaders and leadership is so fundamental that pragmatic governing is not possible without both.
     This systemic realization was a watershed moment in modern political/economic practices. Through the influence of liberal intellectuals it had become gospel that large economies could not run themselves. But it had become even more readily apparent in the real world that politicians should not run them either, to put it bluntly, because they simply didn't know what they were doing. This is true for a simple reason; economic interaction is far, far too complex to be ruled by anyone or anything. Additionally, because government officials approach economic matters from a political perspective, their goals become political goals, which do not necessarily match private goals or public good. Thus, the system could not and would not respond appropriately or effectively to political intervention. When politicians and economists alike grasped that there is a psychology, a human element, as well as a narrow economic method to making a free economy work, progress away from fear of the free market began-and the pendulum's journey back toward the center accelerated.
     The authors note, with regard to the intention of government as it crafted mid-twentieth-century economic policy:

               [In matters of] economic regulation . . . from the New Deal onward,
               market imperfections and failures became a dominating rationale.

In other words, government intervention to fix anything that was perceived to be broken became not just the watchword, it became the raison d'Ítre of administrative activity. Fixing aberrations that found their way to the front page was clearly more politically profitable than pontificating about the value of government abstention on a big picture scale. Yet, almost none of the legislated regulations or bureaucratic intrusions worked to make things better. In most instances they complicated and made worse whatever minor irregularity had previously existed, and which would have most likely self-corrected in any event.
     Hard economic realities experienced up to and including the twentieth century helped tip the scales dramatically toward free-market capitalism in the short twenty years from 1970 to 1990. Inflation had been a

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vicious malefactor for centuries, destroying whole economies, even nations, in matters of years; wise observers who realized the devastation inflation had caused in Germany after World War I didn't want that to happen again. Across the world's economic landscape at mid-century the fiscal burden of liberal tax and spending policies and of government control was becoming overwhelming, with no end in sight. Yet in almost all these nations there was little social progress as a result of these programs. There were just as many poor, backward, bankrupt nations and people as there had ever been, and just as many wealthy and corrupt dictators who sat atop these economic disasters.
     Yergin and Stanislaw note as well that the regulatory burden, which was designed to protect the people from themselves, had become suspect for its rigidity and incapacity-particularly in collectivist societies. During this period governments began to understand both the role and the limits of regulatory effectiveness. None of this happened without the help of political figures and private sector economists who wished to effect free-market rationalism as the controlled economic measures of the collectivists proved not just ineffective, but destructive. As a result of these hard economic lessons, and the example of the free market economies that flourished after World War II, socialist governments began to collapse because of the internal factors and mechanisms by which they were supposed to operate.
     The turnaround started small, most prominently in England in the 1980s under Prime Minister Margaret Thatcher, and grew into a global avalanche of change by the turn of the twenty-first century. In 1950 socialism was the ascendant form of government worldwide; by 1990 it had been buried. The gap between socialism's goals and its performance-and then its ultimate demise-spurred Yergin and Stanislaw's investigations. They engage in an encyclopedic overview of the world's economies; their examination of the leaders and the individual circumstances of each region or country follow what transpired in an effort to quantify those actions and comprehensions that worked and disassemble those that did not. This treatise, essentially an historical textbook without the pedantic touch of academic scolds, is striking by virtue of its details and the authors' skill at tying the facts, figures, and history together.
     The book is divided into chapters that correspond to the economic points to be made and the history of their "discovery" and implementation. The authors observe that perhaps America's most valuable contribution to the world's economies was not only its example of

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free-market capitalism but its ability to change on the fly and to recognize the difference between procedure and substance. For example, in the U.S. the effects of the wartime planned economy, necessitated by the demands of World War II production needs, were not viewed as universally beneficial by war's end. In fact, as the authors note:

               Even liberals wanted, in the aftermath of the war, "to find a role for
               government that would allow it to manage the economy without managing
               the institutions of the economy."
(Quoting Alan Brinkley in The End of
               Reform
[1996])

     Managed capitalism had produced mightily when the war came along-that fact was not lost on the Depression-era American public as it initially was in Europe. Our economic explosion after the war, however (when the economy was allowed to find its own level and measure without governmental guidance), ensured that domestic eyes would easily comprehend how much more the economy could do when freed from regulation and oversight. It was also thought that because of America's material success the public would not be easily blinded by melioristic equalitarian and socialistic paradigms that were in intellectual vogue in Europe at that time. And for a period, it was not.
     The European reaction was different-governments there were still grounded in naive Enlightenment-era ideals of perfect social organization and distribution. The physical and psychological devastation that remained after the war ended reinforced equalitarian impulses; thus government control grew. The contrary but expected economic results obtained on either side of the Atlantic-based on the differences in the respective economic principles used as blueprints-were easy for the authors to dissect.
     As they did with Europe and the United States, Yergin and Stanislaw explore each instance of economic foolishness and genius experienced around the globe, primarily since the end of World War II. Their reach is one of the values of this effort; the reader doesn't have to wonder, well, OK, that's what happened in the U.S. and France, but what about Argentina or Indonesia or Rhodesia? All of the major players and regions are examined, then the whole is fitted together in practical form. The sweep of their survey is daunting because there are so many interconnected pieces and players, but the result leaves the reader with many comprehensions-and, as surely, many questions about the future.

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     Those seeking to still better understand the past century's socio-political movements that went hand in glove with fresh economic forces and philosophies, should consult Paul Johnson's Modern Times (Chapter 22). This companion volume to The Commanding Heights will enable readers to fit many of the twentieth century's puzzle pieces into their proper places. Johnson's comprehensive compendium fills in the political and historical details germane to Yergin and Stanislaw's economically oriented study. After reading both volumes, the complementary scope and value of each book becomes apparent.
     The authors of The Commanding Heights recognize that the battle over economic sanity will never be ended. In the expression of George Shultz, former U.S. Secretary of State, Treasury, and Labor, markets are "relentless," and never-ending competition is sometimes harsh and often wearing. People not infrequently want respite, or protection, even from just having to work with diligence. There thus occasionally arises a clamor for government to do something for us or something to a competitor. It is the human condition that makes reality so difficult. Yergin and Stanislaw are not reluctant to point out this reality. Ultimately, they are optimistic; their confidence is
based on thirty centuries of already achieved results. Today, in spite of some discontent with insecurity (often magnified by the media), we know for certain that government is neither the sole answer nor even the antidote to life's difficulties. The free market's possibilities, the potential for good and bad, and multiple chances to be the creators of our own economic destiny still make more sense than the certainty of socialism's negative and demeaning government dole.
     Finally, in their treatise, Yergin and Stanislaw go to the root of some of society's most deeply ingrained frailties. They see corruption (intellectual, economic, social, and political) and inflation as the two most destructive forces for all economies and all societies. They also aver that government does have a role, but as investigator and arbiter of the myriad social and economic forces extant, not as supervisor. Their ultimate message is that government is not the court of last resort. The people's success will be determined by their willingness to do what is required of them-to be vigilant and steadfast, and free, and to be rewarded both personally and nationally for their efforts, as so many people and nations were after World War II.

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About the Authors
Daniel Yergin was born in 1947 in Los Angeles. He graduated from Yale University in 1968 and thereafter received his Ph.D. from Cambridge University (England) in international relations. He won the Pulitzer Prize for non-fiction in 1992 as co-author of The Prize, a definitive study of the worldwide oil industry. He was the founding chair of Cambridge Energy Research Associates which, as its name suggests, studies and gives advice on energy issues. He is vice-chair of Global Decisions Group, a consulting firm that provides economic and political risk analysis for its clients.
     Joseph Stanislaw is a graduate of Harvard University where he obtained his undergraduate degree. He received his Ph.D. from Edinburgh University (Scotland) and he is president of Cambridge Energy. Previously he taught at Cambridge University and for a time was senior economist for the European Union's Organization for Economic Cooperation and Development (OECD). He is a student of energy and other markets, and does consulting work in those fields.

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